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US mortgage markets have evolved radically in recent years. An important part of the change has been the rise of the “subprime” market, characterized by loans with high default rates, dominance by specialized subprime lenders rather than full-service lenders, and little coverage by the secondary mortgage market. In this paper, we examine these and other “stylized facts” with standard tools used by financial economists to describe market structure in other contexts. We use three models to examine market structure: an option-based approach to mortgage pricing in which we argue that subprime options are different from prime options, causing different contracts and prices; and two models based on asymmetric information–one with asymmetry between borrowers and lenders, and one with the asymmetry between lenders and the secondary market. In both of the asymmetric-information models, investors set up incentives for borrowers or loan sellers to reveal information, primarily through costs of rejection. Copyright Springer Science + Business Media, Inc. 2004asymmetric information, licensing, option-pricing, secondary market, signaling, subprime mortgage market,

This article studies strategic default—the willingness of a borrower to walk away from a mortgage when the value of the home falls below the unpaid principal balance despite an ability to pay. This study differs from the literature in two fundamental ways. First, we use unique data assets describing the household's equity position and capacity to carry the debt in addition to credit performance to identify strategic defaulters accurately. Second, we address externalities from local foreclosures and other strategic defaults and find that the incidence of strategic default is sensitive to the presence of other nearby strategic defaulters. These results have significant implications for foreclosure and loss mitigation policies employed by servicers and investors.

Compositional changes in the cross-sectional data, caused by the entry of high-income persons who are young in the peak year but old in the trough year, obscure the decline in the economic well-being of the cohort of older persons who survived the trough year, in cross-sectional comparisons of older populations in the United States in the 1980s.

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